Estate planning attorneys are frequently asked by clients to explain the difference between a “will” and a “trust.” This is normally in the context of planning for the disposition of assets upon the client’s death – so we surmise that clients are looking for information regarding the differences between and the benefits of both Wills and Living Trusts as testamentary instruments. Many times, our clients will have the general impression that Living Trusts are “better” than Wills and have a notion that they may save taxes, may protect assets in some way, insure privacy and avoid probate, but they aren’t sure and want to understand how they work; and frequently, what we think of them.
Let me state at the outset that my bias is, more often than not, to guide our clients towards a Will as the basic testamentary instrument. While Living Trusts certainly have their place, we don’t favor them as the default testamentary vehicle for reasons we will explain below. However, we have drafted many Living Trusts and believe they are the most appropriate instrument in certain circumstances. Of course, if a client really wants to work with a Living Trust as their preferred document, we will be happy to work with them. After all, there isn’t a “right” or “wrong” way to make these plans. Either document can help a client achieve most common estate planning objectives. The rest of this article will briefly describe probate and wills, and some of the benefits of Living Trusts, along with some of the perils – as opposed to Wills. Second, it will describe the situations in which Living Trusts may be preferable to a Will.
Before we discuss Revocable Living Trusts, it will be important to understand the probate process in our legal system and its role in property transfers. When a person dies owning property, particularly “real property” (real estate) or titled property (automobiles, trailers, bank and investment accounts) – and the property is intended to be given to heirs or other devisees – how can this be done if the owner is dead? The answer is through the probate process in most states. “Probate” comes from the latin verb “probare” which means to “prove, try, test or examine.” It is basically the process of submitting a will to the court for “testing” and distributing the assets as provided in the will of the deceased. In Colorado, Personal Representative, named in the Will, is appointed as the responsible party by the Court. This appointment grants the Personal Representative the authority to pay bills, settle accounts and distribute any property. The process in Colorado (and most states) is fairly simple, inexpensive and un-intrusive. Unless there are conflicts, the Court is not involved and the Personal Representative can handle most of the work, paying bills and distributing property according to the plan detailed in the Will. However, for various reasons, some people would still like to avoid the probate process. One way to do avoid the probate process is by establishing, and importantly, fully funding, a Living Trust.
Revocable Living Trusts
Essentially, a Revocable Living Trust is an entity into which one places all, or most, of one’s assets. As the name implies, the trust can be amended or fully revoked at any time as long as you are alive. The trust document, or “agreement” will normally give the grantor full control over all the assets and income in the trust. In other words, your control over the assets doesn’t change, they are simply “owned” by the trust rather than you as an individual. Ownership by the trust rather than the individual is what gives rise to both the benefits and potential problems of a Living Trust.
Because your assets are owned by the Trust rather than by you as an individual, the Trust doesn’t “die” when you do. Therefore, when you pass away, your successor trustee (named in the Trust Agreement) simply takes over managing your assets and/or distributing them as you direct in the Trust Agreement. In this way, the Living Trust avoid probate – there is no Will to “prove” and follow. A related benefit is that even if you don’t die, but if you either cannot, or will not, manage your financial affairs, your successor trustee (hopefully someone you trust) can step in and manage your affairs i.e. pay bills, manage property and investments and otherwise contract on your behalf.
These benefits are only available if all of your assets are actually in the name of the trust. This is the area where, in our experience, people may lose the potential benefits of a Living Trust. Over time, it is difficult to remember to have all your assets place in the name of the trust. Bank accounts, real estate, investment accounts, life insurance, retirement accounts . . . all need to be owned by the Trust. Sometimes, this just isn’t done at the beginning, or even if it is, over time, assets are bought and sold and habit takes over . . . people tend to forget to put them in the name of the trust. If there are assets titled outside the Trust, at death, it may be necessary to open probate to handle those assets, thus defeating some of the benefits of a Trust. In addition to requiring a bit more effort manage, Living Trusts typically cost more at the outset to set up than a Will which accomplish the same goals for the client.
Benefits of a Trust
Despite some of the burdens of preparing and administering a trust, there are two significant benefits to a Living Trust. The first is for people who own real property titled in a different state. Owning that property in a Living Trust rather than individually will allow that property to be distributed or managed after death without requiring opening a probate case in that state. As stated earlier, the Trust does not “die” and so whomever is successor trustee may simply sell or otherwise manage the property without Court approval through the probate process in that state.
The second benefit is for individuals who are concerned about the management of their assets when they either lose capacity or interest. While a Durable Power of Attorney can provide a trusted individual the necessary authority to manage one’s financial affairs, a Successor Trustee taking over under a trust agreement can be a simpler and smoother process.
Both Wills and Living Trusts can be effective documents for passing assets to heirs and devisees and both may be used to avoid or minimize estate taxes if properly drafted. Living Trusts may provide the benefit of simpler management of assets by a third party (a successor trustee) during your incapacity than is sometimes available under only a Power of Attorney; and Living Trusts can help you avoid probate in a different state if you own property there. Living Trusts will typically cost more to draft at the beginning and transfer your assets into the trust and can be more cumbersome to manage during your life. Both documents (along with a power of attorney) are effective tools for clients and attorneys in planning for a client’s death and/or disability – it will be up to you and your counsel to decide on the right approach for your circumstances.